Rental Income

Rental income is income earned from the letting of real property. Real property includes a house, shop, office building, farm or bare land among others. Rent is the payment in any form made as a consideration for the use or occupation of real property.

The owner of the land or property is known as the landlord.

The individual/corporate body that occupies the land is known as the tenant.

Tax on Rental Income

Up until December 2021, rental income was subject to withholding tax at the rate of 10% and this was a final tax. This meant that once the 10% was deducted and remitted to the Zambia Revenue Authority (ZRA), no further tax was payable.

The landlord would charge the tenant gross rent. The responsibility to withhold and remit the 10% withholding tax to the ZRA was on the tenant. They would then pay the landlord 90%.

2022 Budget

On 29th October 2021, the new dawn administration issued the 2022 National budget. The budget highlighted a reform to the rental income tax regime by charging Turnover tax at the rate of 4% on rental income below K800,000 per annum and applying the Income tax regime for individuals or corporates with rental income above K800,000 per annum. This change was effected to align the treatment of rental income with that of other income sources.

Analysis

Based on the rental income tax reform, it was straightforward that 4% would be charged on rental income below K800,000 however, there seemed to be inequity when applying the income tax regime for rental income above K800,000.

The reason for the inequity was that income tax would be charged at the rate of 30% for corporates, whereas, individuals would be taxed using the Pay As You Earn (PAYE) bands with the highest tax rate being 37.5%.

Income Tax Amendment Bill

In January 2022, Bill 41 of 2021 was enacted and proposed amendments to the income tax rental regime. To resolve the inequity, Bill 41 proposed a tax change to rental income that exceeds the K 800,000 threshold in a year. Rental income would be charged at 12.5%. For rental income below the K800,000 threshold, 4% turnover tax would apply.

Navigating Towards Compliance

1. Individuals that are not registered for any tax type and are solely receiving rental income should register for Turnover tax. This is regardless of whether the rental income is above or below K800,000 per annum. The individuals, being the landlords, will pay monthly turnover tax at either 4% or 12.5% depending on the amount of the rental income.
2. Individuals that are currently registered for income tax and are receiving rental income should account for their rental income tax in the 2022 Provisional Income Tax Return. The provisional tax return submission deadline is 31st March 2022.
3. Individuals that are not registered for any tax type and are in receipt of both rental income  and other business income should base their registration only on the annual turnover of the other business income. If other business turnover is above K800,000 then income tax registration is applicable. If its below K800,000 then turnover tax registration is applicable.
4. Tax payers that are unable to register for Turnover tax because of the provisions of the Income Tax Act, will have to register for Income Tax.
   
   

Summary

• Landlords with rental income above K800,000 in a year will pay 12.5% on the gross rental
• Landlords with rental income below K800,000 in a year will pay 4% on the gross rental
• The responsibility to remit the tax will now be with the landlord
• The return and payment will be monthly with the deadline being the 14th of the subsequent month
• For taxpayers with various income sources, rental income will be treated as a separate income source.

ILLUSTRATION

(i) Landlord A and Tenant B

Landlord A has a house which is being rented by Tenant B. The monthly gross rental charge for Tenant B is K 10,000.

(ii) Landlord C and Tenant D

Landlord C has a house which is being rented by Tenant D. The monthly gross rental charge for Tenant D is K 80,000.

(iii) Landlord E and Tenant F

Landlord E has a commercial property which is being rented by Tenant F. The monthly gross rental charge for Tenant F is K 80,000.

SOLUTION

When solving the above scenarios, we will follow a three step approach :

• DETERMINE THRESHOLD
• TAX RATE APPLICABLE
• TAX PAYABLE

(i) Landlord A and Tenant B

• DETERMINE THRESHOLD 
  

Yearly Rental Income for Landlord A = K 10,000 X 12 months = K 120,000

• TAX RATE APPLICABLE
  

Landlord A has rental income below K 800,000 and thus is required to pay 4%

• TAX PAYABLE
  

Monthly return and payment to ZRA = K 10,000 X 4% = K 400

Landlord A has the responsibility to pay ZRA K 400 on a monthly basis.

Tenant B has to pay Landlord A the gross monthly rental of K 10,000.

(ii) Landlord C and Tenant D

• DETERMINE THRESHOLD

Yearly Rental Income for Landlord C = K 80,000 X 12 months = K 960,000

• TAX RATE APPLICABLE
  

Landlord C has rental income above K 800,000 and thus is required to pay 12.5%

• TAX PAYABLE
  

Monthly return and payment to ZRA = K 80,000 X 12.5% = K 10,000

Landlord C has the responsibility to pay ZRA K 10,000 on a monthly basis.

Tenant D has to pay Landlord C the gross monthly rental of K 80,000.

(iii) Landlord E and Tenant F

It is important to note that rental income derived from letting of commercial property is subject to VAT.

• DETERMINE THRESHOLD
  

Yearly Rental Income for Landlord E = K 80,000 X 12 months = K 960,000

• TAX RATE APPLICABLE
  

Landlord E has rental income above K 800,000 and thus is required to pay 12.5%

• TAX PAYABLE
  

Monthly return and payment to ZRA = K 80,000 X 12.5% = K 10,000

Monthly VAT payable to ZRA =  K 80,000 X 16% = K 12,800

Landlord E has the responsibility to pay ZRA TOT & VAT of K 10,000 & K 12,800 respectively on a monthly basis.

Tenant F has to pay Landlord E the gross monthly rental of K 80,000.

GET IN TOUCH

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